Wednesday, October 22, 2008

It Must Be Wednesday

Top Line: Our top line this evening is a little bit of a backtrack...we think the market wants to finally put in a price low. This process should happen fairly quickly with a washout of prices.

Wednesday's price drop seems to beg for more selloff to come. The prices we are seeing in several stocks are three to five year lows or more. In the case of gold stocks, the HUI index is at levels last seen at the lows of 2004 and 2005 when gold itself was $300 lower than it is today. We have always said that the mining stocks lead the metal itself but we don't have any scenario that allows for gold to go $300 lower as soon as the HUI level would indicate. We have revised our low for gold to $650 on this move.

Back to the real world...our appraisal of the situation changed today but just slightly. We thought the 7900 low back on October 10th would be the low we were looking for but tonight we realize that probably was the momentum low we had talked about in a previous post. Back on October 10th the market put in a strong low with nearly 90% of the stocks hitting new 52 week lows. That is a definite momentum low.

About a week later, on October 16th, the market dropped once again. This time the Dow dropped to 8200, well above the 7900 from the week before. That same day, the NDX did breach its own October 10th low but not by much. On the 10th the NDX just went below 1200 but on the 16th it fell a little further but only to 1192. (Possible nonconfirmation)

Now, there is a lot of panic and fear that the world is coming to an end...again...and the Dow and the NDX closed at 8519 and 1237 respectively. These numbers are not far above the lows but they are indeed above them.

We can't make a good estimate for the low but we do think that there is a good chance for another new low. This should be a buying opportunity for those of you who are still on the fence. We would remind you that if you want to take advantage of this opportunity, you will need to be somewhat nimble due to the likely quickness of the move down. If you are trading in your 401(k), then you have fewer options but if you are trading stocks/ETF's, then you have to Pick a spot to enter.

We of course think that GDX is one of the best values in town and will probably buy more down here, if we get the chance. One thing you can watch for at this point is to have the price of gold drop and finally the GDX Not going down anymore. This would indicate a great buying opportunity for the GDX.

One thing we want to mention about the GDX is the utter collapse in the price. There are certain times that just don't make any sense. As for the miners dropping so much without much drop in the gold price, we think this has to do with the prior owners. They could be hedge funds caught on the wrong side and just looking for cash to meet redemptions. These players have very little interest in fundamentals or good exit points. If they want out, they just sell and as the price drops, others are "forced" out, too.

There is considerable long term value for GDX but in the short run the previous owners have been squeezed out. What is the attitude of the current owners? Are they getting squeezed with this huge decline or are they patient? We think that there are many who have either recently gotten out that are total gold bugs and don't want to be out. Once the price starts up, there could be just a violent of a price move up as there has been on the downside.

We would also like to mention Erick's comment from yesterday's post. Erick mentioned the article we included in Monday's post and we include it here for your ease of reading, "Bernanke is Fighting the Last War". (Go read it again, it's good.) We do agree that we need to take America back and stop this era of government intervention, and don't forget, Federal Reserve intervention.

The current world is starting to come to understand why the economy needs to have recessions once in a while. Ok, maybe we are a little early on That call, too. But, when the world sees that the Fed or the government doesn't let anything bad happen, people start taking undo risk. The Fed augmented its job description while Greenspan was chairman by adding "eliminate the economic cycle, always have growth no matter what level of interest rates allows it".

We have long thought that the biggest problem child in this whole mortgage mess has been the rating agencies. The reason is that they would rate these mortgage backed securities (MBS) at Triple A so investors buying them had "confidence" that they were Safe. Had the rating agencies put a Correct rating on them, they may not have been purchased at all but here we are after the fact. We heard that these rating agencies were in front of a House Oversight Committee answering some questions.

Scott Cohn of CNBC left us this little gem from the meeting. It's a quick read and it's a result of the world where such things could happen. Today, the market will not accept it anymore. That's what bear markets do, they raise investor's awareness of risk. Bear markets do a lot of other good things, but they get such bad press.

Back to Erick's comments...government change out might be a good idea but we would like them to work as little as possible. And, thanks for mentioning the comedian running here in Minnesota. President???

We feel the need to continue this post...it is Wednesday, after all.

The dollar has exploded to the upside over the past few days along with the commodity collapse, which makes some sense. We don't think this trend will hold for long. The dollar has gotten ahead of itself (yes, we still think it can go to 90 but it's almost there now) so there is a possibility for a pullback at least...which would allow a bounce in the commodities or at least their stocks.

One more overall subject. Where we are in the stock market Cycle. We have been calling for a low being put into the market this fall and as usual we were a bit early. The point is that with a low either having already been put in or one that is about to come, we have had a significant destruction of value across the globe. (Asia is down 5% plus again this evening.)

What our focus is happens to be that there are more bears around then we have seen for a long time. There is also more fear out there as prices drop...people sell into the weakness by throwing assets away at whatever they can get. That's the toughest time to be a buyer but it usually is the best time to buy.

Let us make it perfectly clear...We are long term bearish and we might add, Very Bearish. Right now we are experiencing the end of the First large wave down. The next move is an Up move that corrects this 6000+ point drop in the Dow. After that we get the Real Bear market, the one that will have huge percentage drop.

There are so many things to mention this evening but we can't mention them all. The one we are missing is the currency trades that are going on right now and the Japanese Yen is at the center of the conversation...if you have time, go look at the news items centering on Euro/Yen.